Estimation of Optimal International Reserves for Costa Rica: A Micro-Founded Approach (EN)

Abstract

In this paper we apply to the economy of Costa Rica a model for the estimation of the optimal amount of international reserves, developed by Jeanne and Rancière (2006, 2011). The main assumption of the model is that the consumers have the possibility to save a part of their income during normal times to smooth the decrease of consumption possibilities during periods of sudden stop crises. The two most important results are that for all analyzed periods the optimal level of reserves lies above the observed one and that the estimations of optimal reserves show relatively little volatility over time. Accordingly, the core conclusion of the document is that the Central Bank of Costa Rica should increase its efforts to accumulate international reserves in the medium run.